Chewing on the numbers

Food prices have eaten their way into core inflation — minus volatile energy and food — in November. This is the tipping point for monetary policy, which can do little to absorb supply shocks like poor harvests but can tame a demand-induced price line in manufacturing. Although the big push to wholesale inflation last month came from a 16.7 per cent rise in the food index, the more significant statistic is the 4 per cent rise in the manufacturing index. For two reasons. One, industry has thrice the weight of food in India’s most widely tracked inflation index. And two, prices are accelerating more on the shop floor than on the farm. At its June 2009 trough food inflation was sill a high 10.9 per cent from a year ago, but industrial prices were creeping up at 0.6 per cent. In percentage terms, the price of manufactures poses the bigger worry.

With factory output growing at 10.3 per cent in October on the back of a 9.6 per cent gain in September, companies are better placed to pass on rising input costs to consumers than they were a quarter ago. The most striking example of this trend is November’s 24.7 per cent rise in prices of processed food where the cost pressure has broken through. The unabashed rise of food prices — food inflation climbed to 19 per cent in the last week of November — should ease with higher winter sowing of rice and pulses, principal sources of price pressure. But a clearer picture will emerge when the full rabi data comes in.

Wholesale inflation in November at 4.78 per cent is nearly bursting out of the Reserve Bank of India’s comfort zone and the figure for March 2010 could settle at a fourth higher than its latest estimate of 6.5 per cent. A broad section of view sees the central bank beginning to raise interest rates by as early as January. This will in all probability be accompanied by drainage of liquidity from the financial system. The crisis-induced phase of easy money is over for India and the debate over the timing the exit of the government’s stimulus rendered irrelevant. With fiscal policy still hugely expansive, the pressure on interest rates should magnify. The cost of borrowing is a potent argument for a return to fiscal rectitude.